California’s DFPI Targets 11 Crypto Firms Calling Them Ponzi Schemes
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California’s DFPI Targets 11 Crypto Firms Calling Them Ponzi Schemes

DFPI likened the behavior of 11 sued companies as reminiscent of pyramid, and Ponzi Schemes.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

California’s state regulator, the Department of Financial Protection and Innovation (DFPI), announced on Tuesday it filed a series of complaints against 11 little-known crypto firms. According to the press release, the companies acted in a way typical of Ponzi and pyramid schemes.

DFPI Files Complaints Against 11 Companies over Behaviour Reminiscent of Ponzi and Pyramid Schemes

DFPI filed a series of complaints targeting 11 crypto companies in an effort to curb digital assets-related crime and fraud. The firms involved in the affair include Elevate Pass LLC, Pegasus, Remabit, Sity Trade, and Vexam Limited.

Out of these 11 companies, ten allegedly lied and mislead their investors, nine offered to trade investors’ cryptocurrency in their stead, one depicted itself as a DeFi platform, and another solicited funds to work on a metaverse platform. All of the platforms offered financial incentives to their users to find additional customers for the companies. 

The entities are all alleged to have used investor funds to pay purported profits to other investors, in the manner of a Ponzi scheme. Furthermore, each of the entities had a referral program that operated in the manner of a pyramid scheme. The entities promised to pay investors commissions if they recruited new investors, and additional commissions if the investors that they recruited, in turn, recruited new investors. The referral programs achieved their desired effect, incentivizing investors to create and post content to social media websites, such as YouTube, to entice others to invest in these entities.

According to the press release, all 11 companies operated what is known as high yield investment programs (HYIPs). For example, the complaint against Sytrex Trade alleges that the company was using its HYIP program to fraudulently lure in new investors:

In fact, Sytrex Trade was luring investors into what is known as a High Yield Investment Program (HYIP). HYIPs are unregistered investments typically run by unlicensed individuals – and are often frauds. The hallmark of an HYIP scam is the promise of high returns on an annual (or even monthly, weekly, or daily) basis at little or no risk to the investor. Another key element of most HYIPs is a referral program, in which the HYIP offers referral commissions or bonuses to investors to recruit new investors. This usually leads to investors sharing information about the HYIP with their friends and family and promoting HYIPs on social media. HYIPs rarely disclose the identities of the individuals operating the HYIP.

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DFPI Recent Actions to Regulate Crypto and DeFi

Today’s action by the DFPI, as well as several earlier similar efforts, are in accordance with a 2022 executive order signed by the state’s Governor, Gavin Newsom. The order deals with how the state’s financial regulator is to help facilitate safe and responsible advance of DeFi, and protect consumers and investors. 

On Monday, September 26th, DFPI issued a cease and desist letter against Nexo, a crypto lender accused of offering unregistered securities. The action against Nexo was a part of a wider effort against the company undertaken by eight states.

California undertook similar actions to the one against Nexo earlier this year when it targeted companies like BlockFi Lending LLC, Voyager Digital LLC, and Celsius Network Inc. Among these, both Voyager, and Celsius filed for bankruptcy in the meantime.

DFPI Commissioner Clothilde Hewlett explained today’s as well as earlier actions as a way to keep California a “premier global location for responsible crypto asset companies to start and grow.” The Commissioner also added that “the DFPI will continue to protect California consumers and investors from crypto scams and frauds.”

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Do you think actions like those of the DFPI will help root out Ponzi and pyramid schemes from the crypto sector? Let us know in the comments below.